MULTINATIONAL

CORPORATIONS

Module - 6
Objectives of the module
 Multinational Corporations

 Organization , design and structures

 Head quarters and subsidiary relations in

multinational corporations
Foreign capital : Need
 Sustaining a high level of investment
 The technological gap
 Exploitation of natural resources
 Undertaking the initial risk
 Development of basic economic
infrastructure
 The Foreign exchange gap
 This foreign capital is generated by
private participation of foreign players or
by allowing MNCs in the country or FDIs.
MNC
 A corporation that has its facilities and
other assets in at least one country
other than its home country. Such
companies have offices and/or factories
in different countries and usually have a
centralized head office where they co-
ordinate global management. Very large
multinationals have budgets that exceed
those of many small countries.
 Sometimes referred to as a "transnational
corporation".  
 Nearly all major multinationals are either
American, Japanese or Western European,
such as Nike, Coca-Cola, Wal-Mart, AOL,
Toshiba, Honda and BMW.
 Advocates of multinationals say they create
jobs and wealth and improve technology in
countries that are in need of such
development.
 On the other hand, critics say
multinationals can have undue political
influence over governments, can exploit
developing nations as well as create job
losses in their own home countries.
Multinational Corporations
 Dynamics of economic liberalization

 Led to expansion and growth of MNCs

 Acc. To World Investment Report 1997

there were 45,000 MNCs with some
280,000 affiliates

 Acc. To World Investment Report 2002

there were about 65,000 MNCs with some
8.5 lacs foreign affiliates
 Developed countries account for only 12
% of these

 China host to more than 3.5 lacs of

affiliates

 Three-fourth of them in developing

countries
Indian Scenario
 More than 1400 in India………………….
Organization Structure
 Defining Organizational Structure

Vertical Differentiation
 Arguments for Centralization
Arguments for Decentralization
 Horizontal Differentiation
 International Division
 Worldwide Area Structure
Strategic Business Unit
Product Division Structure
Matrix Structure
 Network Structure.
Organizational Architecture
 Totality of a firm’s organization, including
firm’s formal organization structure, control
systems & incentives, organizational
culture, processes & people

 Three conditions need to be fulfilled for

successful architecture:
 The different elements of firm’s architecture
should be internally consistent
 Must fit the strategy of the firm

 Strategy & architecture must be fit with

competitive conditions in the market
Organization Structure
I. The formal division of the organization into
subunits such as product divisions, national
operations, and functions (Horizontal
differentiation)

II. The location of decision making responsibilities

within that structure (centralized or
decentralized) – Vertical Differentiation

III. The establishment of integrating mechanisms

to coordinate the activities of subunits including
cross-functional teams and or pan-regional
committees – integrating mechanisms
Vertical Differentiation
 VD determines where in its hierarchy the
decision making power is concentrated

 E.g., Are production, marketing &

finance decisions are centralized to the
top-level managers or decentralized to
low level managers

 Let’s discuss on arguments for

centralization and decentralization
Arguments for
Centralization
1. Centralization can facilitate coordination

3. Centralization can help ensure that

decisions are consistent with
organizational objectives

5. Centralization can give top-managers the

means to bring about needed
organizational changes

7. Centralization can avoid the duplication of

activities that occurs when similar
activities are conducted by various
subunits within the organization
Arguments for
decentralization
1. Top mgmt. can become overburdened
when decision making authority is
centralized & can result in poor decision
making
2. Motivational research favors
decentralization
3. Decentralization permits greater
flexibility
4. Decentralization can result in better
decisions
5. Decentralization can increase control
Strategy & Centralization in
International Business
 The choice between centralization &
decentralization

 Centralize some decisions & decentralize

others, depending upon the type of
decisions & the firm’s strategy
Firms pursuing Global
Strategy
 They must decide how to disperse the
various value creating activities around the
globe so location and experience
economies can be realized

 The head office must make decision about

where to locate R&D office, production &
marketing & so on

 The globally dispersed web of value

creation activities that facilitates a global
strategy must be coordinated. This creates
pressure for centralizing some operation
 In contrast, the emphasis on local
responsiveness in multi-domestic firms
creates strong pressures for
decentralizing operating decisions to
foreign subsidiaries

 International firms tend to centralize

their core competencies and to
decentralize other decisions to foreign
subsidiaries
Horizontal Differentiation
 How the firm decides to divide itself into
subunits

 May be based upon function, type of

business, or geographical area
The structure of Domestic
firm
Owner / Manager

Owner/Manager makes all major

decisions directly and monitors all
activities

Difficult to maintain this structure as

the firm grows in size and
complexity
 As firm grows, the demand of
management become too great for one
individual or a small team to handle

 At this point the organization is split into

functions reflecting the firm’s value
creation activities – production,
marketing, R & D, sales
 Functional Structure
Top Management Level

Purchasing Manufacturing Marketing Finance Advertising

Branch Branch Branch Branch Branch Branch

unit 1 unit 2 unit 3 Unit 4 Unit 5 Unit 5
 Further, horizontal differentiation may
be required if the firm significantly
diversifies its product offerings
 Problems of coordination & control arise
when different business areas are to be
managed within the framework of a
functional structure
 At this stage most firms switch to a
product divisional structure
 With a product division structure is
division is responsible for a distinct
 Product Divisional Structure
Structure
Headquarters

Division-Product Division Division Product

Line A Product Line B Line C

Dept. Dept. Dept. Dept. Dept. Dept.

Purcha Manufac Marketin Finance Product adverti
sing turing g ion sing
 International Divisional
Structure
Headquarters
Domestic Internatio
Domestic Domestic
Division GM Division
Divisio
Division- GM Division –GM
Product Line Cc GM
Product Line A Product Line B

Country 1 Coun
GM GM
Product A,B,C Product
Worldwide Area Structure

North American Latin American

Area Area

European Area
Multinational Middle Eastern
Headquarters African Area

Middle East
Far East Area
area
 Worldwide Product Division
Structure
Worldwide Worldwide
Products Products
Division A Division B

Area 1
Domestic
Worldwide Multinational Worldwide
Products Products
Division F Headquarters Division C
Area 2
ernational

Worldwide Worldwide
Products Products
Division E Division D
 Global Matrix Structure

North American Area European Area Pacific Area

Canadian Mexican United British French Japanese Taiwan

Division Division States Division Division Division Division
Division

Chemicals
product
group

Consumer
goods
product group

Automobile
product
group

Individual business division

28 8-
 Matrix Organization at Stewart
Martha
Area Merchandising
Media Group
Speciali Group
sts

Network/
Cable TV

Retailing
Magazin

Specialt
Internet

Newspa

Catalog
K-mart
Radio/
Books

Sears
Paint
Line

Line
per
es

y/
Cooking
Entertain
ment
Weddings

Crafts
Gardenin
g
Home

Holidays

Children
6 - 29
 Relationships between
headquarters &
subsidiaries
 Few subsidiaries can be directly managed
by an MNC
 If the number is more, it has to make a
permanent structural relationship between
itself & its subsidiaries

 Since, MNC supplies various resources &

inputs to its subsidiaries and receives inputs
from the subsidiaries
 This activity needs to be controlled &
coordinated
Different aspects of
relationship

 Information Sharing
 Resource Sharing
 Decisions flow
 Co-ordination of activities
 Control of operations
 Strategy Formulations